Apple (AAPL 0.01%) is far from being on a level playing field with a streaming giant like Netflix (NFLX +0.96%), but since the initial launch of Apple TV+ a year ago, the tech titan has amassed an impressive lineup of original programming. While the selection is still lacking compared to competing services, it's clear that Apple is opting for quality over quantity, and with its massive war chest of cash, Apple TV+ could emerge as a major force in the entertainment industry before too long.
Apple originals are getting recognized
At the unveiling in March 2019, Apple pitched its video-streaming service as the destination for the highest-quality originals. Dozens of the biggest names in the entertainment business were highlighted as partners to make original content for the new service, including Steven Spielberg, Bill Murray, Spike Lee, Ron Howard, and J.J. Abrams, among other film heavyweights.
The cast of See, one of 47 originals available on Apple TV+. Image source: Apple.
Over the last year, Apple has launched 47 originals spanning comedy, drama, action, documentaries, and shows for kids, and some of these films and shows are already drawing high praise from the cognoscenti. Earlier this year, Apple originals received a grand total of 18 Primetime Emmy Award nominations -- a record for the most nominations of any streaming service within the first year of launch.
Where Apple hasn't had the capacity to create enough big hits to fill its service, it has used its cash reserves to go out and acquire what it needs, such as the action-war thriller Greyhound starring and written by Tom Hanks. Apple acquired the rights to the film from Sony's pictures division after theaters closed during the pandemic.
It was reported that about a third of those who watched Greyhound were new to Apple TV+. The release of Greyhound was so successful that Apple is rumored to be interested in releasing several new movies per year, with a few blockbusters thrown into the mix.
Apple has the resources to be a major player in streaming
Analysts originally expected Apple to spend $1 billion on new content in the first year, which is consistent with the level Disney planned to spend for Disney+. But in June, reports surfaced that Apple was increasing its content budget to $6 billion. That is about half of what Netflix is currently spending per year on additions to its content library.
Apple ended fiscal 2020 with $84 billion of net cash, which management has been gradually reducing by returning capital to shareholders through dividends and share repurchases. But the company still produces more cash than it needs to invest in the development of new iPhones, iPads, Macs, wearables, and other products. Selling millions of these products last year produced $73 billion in free cash flow. Suffice to say, Apple can spend just about whatever it needs to grow Apple TV+ over the long term.
What does Apple TV+ mean for the stock?
By itself, the growth of Apple TV+ won't move the needle for Apple. If Apple TV+ attracted 200 million subscribers, a similar level as Netflix, it would only marginally increase the value of Apple's business. Consider that Netflix has a current market capitalization of $223 billion, but that is not much compared to Apple's market cap of $2 trillion.
Moreover, subscribers of Apple TV+ are less monetized than Netflix subscribers. Netflix charges $8.99 per month for a basic plan, but Apple TV+ is only $4.99 per month. Plus, Apple is giving away a free year of the service for a limited time to anyone who buys a new iPhone, iPad, Apple TV, Mac, or iPod Touch.
However, Apple TV+ has an important role to play in growing the value of Apple's services business. Evercore ISI analyst Amit Daryanani believes all Apple services, including News+, Arcade, and the App Store, could bring in more than $100 billion per year in revenue by fiscal 2024. Based on Daryanani's estimates, that would account for 30% of Apple's annual revenue and 45% of gross profit in the next four years. That would move the needle.
Apple just recently introduced the Apple One subscription plan, which could go a long way to attracting new subscribers. With a single subscription, users get access to Apple Music, Arcade, News+, Fitness+, iCloud, and Apple TV+, and at $29.95 per month, the subscription represents a substantial discount over what these services would cost individually.
Image source: Apple.
There are 1.5 billion active devices worldwide that make up Apple's installed base. While selling iPhones is still the company's bread and butter, services give the company many levers to increase revenue per user and deliver more returns for investors. For example, the investments Apple is making in streaming would allow Apple TV+ to gradually raise the subscription fee from the relatively low $4.99 per month.
This is how subscription services can add an element of pricing power for Apple, which would help smooth out some of the lumpy revenue performance that comes from selling iPhones. They accounted for half of its total revenue last year.
Services is a profitable revenue stream that grew 16% in fiscal 2020, reaching $53 billion in annual revenue. Many investors are counting on this growing business to make up for slowing sales of iPhones. The more Apple can build its content library and grow the value of Apple TV+, the faster services revenue will increase and fuel this tech stock higher over the long term.
